Succeeding in
business is very simple.
To succeed, one simply needs to
follow the universal laws of business reality. Whether the business is
a one-person shop or a billion-dollar conglomerate, they are governed
by the same business reality.
Many people spend thousands of dollars on an MBA without learning
to pull the pieces of the business puzzle together. The most important
thing to remember is that business principles are universal. While it
may appear that running a one-person business is simpler, it requires
the same kind of decision-making a CEO of a billion-dollar company. According to Ram Charan who wrote the book, WHAT the CEO
Wants You to KNOW the "best CEOs and the man or woman running the
one person shop think the same way."
If a person understands that certain business principles are
universal, then that person has what Charan calls
"business acumen." According to
Charan, every business conforms to the three basic parts of
moneymaking - cash generation, return on assets (combination of margin
and velocity), and growth.
1. Cash generation
is the difference between all the cash that flows in the business and
the cash that flows out. Cash is the lifeblood of any business, or as
Charan describes it, "the company's oxygen supply."
2. Return on
assets
(combination of margin and
velocity). Earning a good return on assets has two components - profit
margin and velocity. Return on assets is simply nothing more than
profit margin multiplied by velocity. In simple arithmetic, return on
asset is
Return = Margin x Velocity
A grocery owner will earn more if she is able to clear her shelves
and replace the goods everyday. Wal-Mart, for example, has a 360
inventory turns in toilet tissue. This implies that the entire
inventory of toilet tissue is sold almost everyday. Wal-Mart,
therefore, recoups its investment in toilet tissue everyday, plus some
profit.
Even if profit margin is small, a business can thrive if it has a
fast turnover of its inventory. A faster velocity leads to a higher
return. The faster the inventory reaches the customer, the better it
is for the business. According to Charan, the best companies have a
return on assets greater than 10 percent after tax.
3. Growth
is vital to every business.
It energizes the business and creates new opportunities. However,
growth for growth's sake does not do any good. According to Charan,
the growth of a business "must be accompanied by improved margin and
velocity, and the cash generation must be able to keep pace."
Another characteristic of a person possessing business acumen is
his or her ability to find opportunities for profitable growth when
others can't. Charan gives the case of Wal-Mart and Sears, and the
difference in the two giant's approaches to growth. In mid-70s, Sears
considered the retail sector as a mature business with no room for
growth. Hence, Sears diversified into new markets and opened its
financial services division. On the other hand, Wal-mart continued to
open new stores while maintaining a higher-than-average return on
assets. Wal-mart's bold move when others considered the industry flat
paid off: in 2000, Wal-Mart had sales of $165 billion compared to
Sears' sales of about $40 billion.
4. Customers.
A universal law of business is that no business can thrive without
customers. In thinking about customers, Charan advises to keep it
simple. A business owner must clearly know what the customer is
buying. It may not be the physical product or service alone, but
intangible qualities such as reliability, convenience or
trustworthiness.
The secret of the great CEOs of our time, such as Jack Welch of
General Electric, is their "intense focus on the fundamentals of
business." The best CEOs have a knack for bringing the most complex
business down to the fundamental business principles
